UK services sector perks up in February, keeping BoE on track for May hike

LONDON (Reuters) - Britain’s services businesses perked up in February after the weakest start to the year in almost a decade, according to a survey that reinforced market bets that the Bank of England will raise interest rates again in May.

A pint of beer is served through rows of beer pumps at the Campaign For Real Ale Great British Beer Festival at Earls Court in London August 2, 2011. REUTERS/Luke MacGregor/Files

Britain looks on track to sustain the same growth rate as late 2017, helped by strong global growth, economists said. But headwinds persist from weak consumer spending and investor caution before Britain quits the European Union in March 2019.

The IHS Markit/CIPS services purchasing managers’ index (PMI) rose to a four-month high of 54.5 from 53.0 in January, beating the average forecast in a Reuters poll of 53.3.

January’s reading had been the weakest for that month since 2009, when the economy was deep in recession, and February’s data remains weaker than the euro zone PMI.

IHS Markit economist Chris Williamson said Britain’s PMI data so far this year pointed to first-quarter economic growth of nearly 0.4 percent, even taking into account last week’s subdued manufacturing PMI, which slipped to an eight-month low.

This rate of growth is only fractionally weaker than in the last three months of 2017 - and in line with what the BoE believes to be the economy’s maximum non-inflationary growth rate - so made a May rate rise likely, Williamson said.

Firms in the survey - which does not include retailers - reported strong business-to-business sales, helped by global demand. Orders grew by the most since May 2017.

“With Bank of England policymakers sounding hawkish even following the January fall in the PMI to a one-and-a-half-year low, the February upturn in the surveys surely leaves a May rate hike very much in play,” Williamson said.

Unusually heavy snow over the past week was unlikely to have a big effect on growth for the first-quarter as a whole, economists said.

MAY RATE RISE?

Most economists polled by Reuters expect the BoE to follow November’s first interest rate rise in a decade with another in May, assuming Prime Minister Theresa May secures a Brexit transition deal with the EU before then.

Inflation hit its highest in more than five years in November at 3.1 percent, and the BoE forecast last month that it would overshoot its 2 percent target for the next three years.

The Confederation of British Industry reported on Sunday that its monthly growth index hit a two-year high in February, led by manufacturing and business and professional services, and the EEF manufacturers’ lobby was upbeat on Monday.

But Samuel Tombs of Pantheon Macroeconomics said that signs of softening inflationary pressure in the services PMI raised the prospect that inflation would drop off more quickly.

“The (BoE) might feel it has invested too much reputational capital to hold back from raising rates in May, but the data won’t support a series of hikes this year,” he said.

A statue is silhouetted against the Bank of England in the City of London, Britain, December 12, 2017. REUTERS/Clodagh Kilcoyne /Files

Financial markets currently price in a more than 50 percent chance that the BoE will raise its main interest rate twice this year, taking it to 1 percent.

The services PMI showed that firms raised prices at the slowest rate since August, though still by more than average, and consumer-facing businesses in particular are suffering.

Separate industry figures on Monday showed an ongoing year-on-year decline in new car registrations, and last week two well-known British retailers, Toys R Us UK and electronics chain Maplin, sought protection from creditors, putting 5,500 jobs at risk.